INFORMATION TECHNOLOGY FINANCE 824 – SIM CLASS WINTER 2010 Weston Conway Daniel Kujawa Ronald Jewsikow Maria Malguarnera Steven Muszynski Agenda • Overview • Business Analysis • Economic Analysis • Financial Analysis • Valuation Analysis • Recommendation Overview – Information Technology • Information technology segment is made up of 811 companies. • Info Tech is the largest sector in the S+P 500 which comes out to 19.06% • Info Tech is 18.06% of SIM’s holding • Apple • Intel • Corning • Oracle 4.8% 4.1% 4.0% 5.3% Overview – Information Technology • In terms of market capitalization, three of the largest five companies are in the information technology sector. • 2. Apple Inc. • 4. Microsoft • 5. IBM @ 319.22 B @ 233.33 B @ 203.75 B Sector Weight Telecom, 2.92% Utilities, 3.26% Energy, 12.70% Materials, 3.65% Telecom, 4.30% Utilities, 2.32% Materials, Energy, 3.23% 11.54% Industrials, 11.15% Info Tech, 18.97% Info Tech, 21.51% Financials, 16.13% Cons. Disc, 10.30% Health Care, 10.70% S&P 500 Cons Staples, 10.21% Industrials, 11.08% Financials, 11.74% Health Care, 13.19% SIM Cons. Disc, 9.31% Cons Staples, 9.04% Industries Within Information Technology • There are 16 different industries • The biggest few are: • Systems software • Computer Hardware • IT Consulting • Internet Software Key Companies Market Cap Apple Inc. 319.22 B Microsoft Inc. 233.33 B IBM 203.75 B Google 195.38 B Oracle 164.81 B Cisco Systems 122.22 B Intel Corp 120.93 B Siemens AG 111.05 B Hewlett-Packard 103.89 B Qualcomm 90.78 B Sector Performance Info Tech S&P 500 Quarter to Date 5.25% 4.32% Year to Date 5.25% 4.32% Business Analysis • Sector Growth depends on • Business Spending • Innovation • Product Adoption • Continued Margin Improvement • Cyclical sector • Economic expansions bring more business and consumer spending. • Becoming more of a need than a want Growth Opportunities • Some sectors more mature • Emerging market, clean tech, and virtualization • Potential growth drivers • Governments continue to subsidize clean technology Porter’s Five Forces • Bargaining Power of Suppliers –Low • No significantly large supplying firms, switching costs are low for the industry • Bargaining Power of Buyers –Low • Not many significant substitutes • Many buyers relative to the companies in the sector • Industry Rivalry –High • Innovation is crucial for success, leading to company competition to have the best product available Porter’s Five Forces • Threat of New Entrants –Low • High barriers to entry – Large R&D costs due to push for innovation • Few large competitors in each industry within the sector • Threat of Substitutes –Moderate • Alternative products constantly produced Life – Cycle Information Technology Economic Analysis 8 600.0000 R =.79 6 500.0000 4 400.0000 2 0 300.0000 "GDP" -2 200.0000 -4 100.0000 -6 -8 11/01/2005 0.0000 11/01/2006 11/01/2007 11/01/2008 11/01/2009 11/01/2010 Real GDP vs. Information Technology "Information Technology" Economic Analysis 600.0000 140.0000 R =.44 500.0000 120.0000 100.0000 400.0000 80.0000 300.0000 60.0000 Information Technology Consumer Confidence 200.0000 40.0000 100.0000 0.0000 20.0000 0.0000 Consumer Confidence vs. Information Tech Economic Analysis 500.0000 10 450.0000 400.0000 R =.79 5 350.0000 300.0000 0 250.0000 Information Technology 200.0000 -5 150.0000 100.0000 -10 50.0000 0.0000 -15 Durables vs. Information Tech Durables Economic Analysis 500.0000 40 450.0000 R =.53 30 400.0000 350.0000 300.0000 20 10 250.0000 200.0000 150.0000 Information Technology 0 Capital Spending: Computers & Periphials -10 100.0000 -20 50.0000 0.0000 -30 Computers & Periphs vs. Information Tech Key Drivers for Success • Real GDP • Consumer Confidence • Durables • Global Semiconductor Bookings Financial Analysis • Margins • Consistently growing but not as high vs. S&P 500 as the 5 yr high • Cash flows • Generating free cash flows Financial Analysis Financial Analysis Sector Revenue & Earnings Growth Financial Analysis Computer Hardware Revenue & Earnings Growth Financial Analysis Semiconductor Revenue & Earnings Growth Financial Analysis Systems Software Revenue & Earnings Growth Financial Analysis Earnings Growth Apple Intel Oracle Financial Analysis Earnings Growth Apple Intel Oracle Financial Analysis-Performance EPS 2010 2009 2008 Info Tech 36% 0% 1% Computer Hardware 22% 12% 12% Semiconductor 136% 5% -23% Software Systems 7% 2% 9% Apple 51% 67% 34% Intel 75% 27% -23% Oracle 16% 11% 27% S&P 500 Financial Analysis-Performance Revenue 2010 S&P 500 2009 2008 -11% 5% Info Tech 13% -8% 4% 16 22% -1% 11% Semiconductor 28% -8% 2% Software Systems 8% -2% 3% Apple 52% 14% 53% Intel 24% -7% -2% Oracle 15% 4% 24% Valuation Analysis - Sector Absolute Basis High Low Median Current P/Trailing E 64.9 11.1 23.3 15.8 P/Forward E 61.4 11.6 20.9 14.1 P/B 6.5 2.3 3.9 3.6 P/S 4.2 1.3 2.5 2.5 P/CF 31.6 8.2 14.9 11.6 Relative to SP500 P/Trailing E High Low Median Current 2.6 .91 1.4 1.0 P/Forward E 2.5 .93 1.3 .99 P/B 1.8 .9 1.4 1.6 P/S 2.1 1.5 1.8 1.9 P/CF 2.1 1.1 1.4 1.2 Valuation Analysis – Industry Absolute Basis P/E High Low Median Current Semi-Conductor Industry 32.9 12 19.7 15.1 Financial Services 21.4 12.0 16.5 15.7 Computer Hardware 20.8 10.8 15.6 13.3 Computer Software 20.3 9.8 14.9 13.0 Hardware 19.3 8.6 11.7 12.9 High Low Median Current Semi-Conductor Industry Financial Service 1.4 .84 1.2 1.1 1.4 0.84 1.1 1.1 Computer Hardware 1.3 0.81 1.1 0.91 Computer Software 1.3 0.78 1.0 0.89 Hardware 1.4 0.67 0.83 0.88 Relative to SP500 P/E Valuation Analysis – Company Absolute Basis P/E High Low Median Current Intel 2.1 .82 1.2 1 MasterCard 2.2 0.96 1.3 1.0 Apple 39.2 14.3 25.8 14.8 Oracle 19.1 10.6 14.6 15.3 Corning 25.9 7.7 13.9 11.3 Relative to SP500 P/E High Low Median Current Intel MasterCard 2.2 2.2 .96 0.96 1.3 1.3 1.1 1.0 Apple 2.7 1.0 1.7 1.0 Oracle 1.2 0.81 1.0 1.0 Corning 1.6 0.57 0.99 0.77 Technical Analysis Recommendation • Increase by 100 basis points • Expanding margins, ROE, etc. • Significant Growth Opportunities